The senior executive team from Swap & Co. made the long journey...

The senior executive team from Swap & Co. made the long journey from Swap Island to Sydney yesterday for the AVG AGM and other matters. Given the AGM location, we spent all morning dressed up as senior police officers practicing our funny handshakes just in case it was going to be difficult to get in.

It's hard not to like the company. The directors are paid a pittance and there seems to be a passion from everyone concerned. Even the shareholders are deeply attached to their company and I sensed many of them have traveled a long way to be there. Big Brian is the larger-than-life company heart that still beats loudly.

However, there are some stark commercial realities than need to be faced and it seems to me that the shareholders are lagging the company in this regard. There was a distinct air of nostalgia from the onlookers present, most of whom have been on the ride since day 1.

The fact of the matter is that the Australian wine industry is at a very low point in the cycle. There is gross oversupply (as evidenced by the presentation yesterday) and we are facing headwinds from a drop in demand, product substitution, competition (domestic and global) and a strong A$.

Having followed the company for a while, it is clear that when the penny did finally drop, the senior team moved (as best they can) onto the front foot to get on top of the issues. Costs have been reduced, they have worked hard on branding and have taken the hard decisions around provisioning. Without a doubt there have been some casualties along the way and this was inevitable.

To their credit, the top team does have depth. Dane Hudson comes from the right background and appears to be a quality player. So too Mike Noak, who showed the extent of his knowledge when he spent time talking to us at Swap & Co. earlier in the year. There is depth in the board with the likes of Ian Ferrier (although he has waaay too much on his plate), Big Brian and the grim reaper, Richard Davis.

So, with all this goodwill from owners, the sense of history that surrounds the company and the strong, passionate management team, what are the long-term prospects like?

My personal view is that this is very hard to call.

On the upside, one would hope that the huge company changes and structural shift in the industry should play right into AVG. A number of smaller competitors have been wiped out and the larger players are in a whole world of pain. Couple this with a global recovery, the opening of new Asian markets and even population growth and you should have a recipe for success. Cashflow seems to have improved and we will see an increase in NPAT this coming year, although some of this will be from the non-refundable Loxton deposit.

On the downside, it's possible the international post-recovery consumption of Oz wine will actually continue to decline. The same can also be said on a domestic level; most bottle shops now have enlarged sections of overseas wines and I can safely say over 50% of the white wine I have consumed in the last 12 months was from NZ. Then there is the huge industry inventory and continued oversupply. I also worry about how the Constellation merger will impact the company on both an economic and emotional level. The company also suggested we won't see a divvy for a while.

You only have to look at the top 20 shareholders to see this is a value play which should give some comfort to existing holders. By our calculations, Orbis have an average cost around $1.77 per share and they are still hanging in there. On a book value basis, the company is substantially undervalued but beware that on a liquidation or fire sale basis, it probably is not. I'd also caution that a substantial holder who wants to exit at short notice will do some serious damage to the share price. The opposite is also true so any very good news will send the SP quickly north as we saw a few months back.

At 27c, the risk/reward is probably there, but I'd feel a lot better at 20-22c, which is around 25% of YE09 NTA. If the merger goes through on favourable terms and management can clearly articulate where the value will be generated, it may be worth considering a buy.

As it turned out, entry into the AGM was painless and we didn't need to show our fake masonic ID badges. The company made sure we were very well fed, well watered and even gave us a free 2 bottle carryout each.

It was definitely worth the journey.